Matter 4—Capital
FACTORS USED BY THE FDIC IN EVALUATING REQUESTS
The PCI SOP provides guidance to PCIs interested in acquiring or investing in failed insured depository institutions, including the terms and conditions that PCIs are expected to satisfy to obtain bidding eligibility for a proposed acquisition structure. With certain exceptions, the SOP applies to:
• Private investors in a company, including any company acquired to facilitate bidding on failed banks or thrifts that is proposing to, directly or indirectly, assume deposit
liabilities, or such liabilities and assets, from the resolution of a failed insured depository institution; and
• Applicants for insurance in the case of de novo60 charters issued in connection with the resolution of failed insured depository institutions.
Among other things, the PCI SOP generally provides that (1) for 3 years following the
acquisition, the PCI institution hold a greater minimum level of capital than the level required of non-PCI institutions, (2) the PCI may not sell its shares in the bank without prior FDIC approval for 3 years following the acquisition, and (3) the PCI must provide the FDIC with any
information considered necessary to assure compliance with the PCI SOP.
PCIs may make a written request for clearance to bid on future resolutions. The FDIC’s RMS, in coordination with the Legal Division (Legal), processes clearance-to-bid requests. Those
requests may be processed by the FDIC as either a shelf charter or an inflatable charter depending on the circumstances of the proposed acquisition.
• Shelf Charter. In the shelf charter process, the PCIs propose to establish a new insured depository institution to be used as a vehicle to acquire failed banks or thrifts. In these cases, the clearance-to-bid request is accompanied by an Interagency Charter and Federal Deposit Insurance Application (deposit insurance application) to the FDIC and to the designated chartering authority for the proposed new depository institution. RMS and Legal process the deposit insurance application in conjunction with the clearance-to-bid request, in consultation with the designated chartering authority.
• Inflatable Charter. In the inflatable charter process, the PCIs may file an Interagency Bank Merger Act Application (merger application) or an Interagency Notice of
Acquisition of Control (change-in-control application) with the primary federal regulator for an existing institution61 in conjunction with a request for clearance to bid from the
60 De novo is a term used to refer to a recently chartered insured institution.
61 A PCI may also file a merger or change-in-control application with the FRB if the investment is made at the holding company level.
FDIC. If the existing institution is still in its de novo period, 62 the clearance-to-bid request may be accompanied by a change in business plan application. For state nonmember institutions, RMS and Legal process the merger, change-in-control, or change in business plan application in conjunction with the clearance-to-bid request. For other than state nonmember institutions, RMS and Legal process the clearance-to-bid request in consultation with the primary federal regulator.
If the PCI investors are deemed qualified based on the Legal and RMS reviews, the PCIs and related PCI institution receive a clearance-to-bid letter from the FDIC advising that RMS has qualified them to bid on one or more failing insured depository institutions. The clearance-to-bid letter includes any limits on the PCI’s asset and deposit acquisition amounts, as well as any restrictions on the geographic areas for PCI bids. In some instances, the letter requires that additional information be provided to the FDIC before a bid can be submitted on a specific institution, and notes that any material changes in the information, representations, or
commitments provided to the FDIC could alter the FDIC's decision to qualify the PCI institution to bid. Further, the letter includes a notification to the PCIs that the submission of a bid will be deemed to constitute agreement to abide by the PCI SOP. PCIs submit a signed copy of the clearance-to-bid letter before the PCI institution will be permitted to bid on a failing institution. RMS and Legal jointly review PCI clearance-to-bid requests. Concurrently with Legal, RMS assesses any applications for deposit insurance (for shelf charters) or for change-in-control, merger, or material changes in business plans, as applicable (for inflatable charters).
Clearance-to-Bid Requests. When Legal reviews a clearance-to-bid request, it makes a threshold determination as to whether the PCI SOP is applicable. The attorney will typically conclude, subject to certain exceptions,63 that the PCI SOP applies if the proposed transaction includes the acquisition of a failed bank or thrift by an institution that has, either directly or through its holding company, raised capital from private investors in contemplation of such an acquisition. If the PCI SOP is applicable, the attorney is required to review whether the PCI and the proposed transaction address the following requirements outlined in the PCI SOP:
(1) Capital Commitments. The resulting depository institution must maintain a ratio of Tier 1 common equity to total assets of at least 10 percent for the first 3 years of operation and remain Well Capitalized for purposes of the PCA provisions.
62 The deposit insurance order for a de novo institution generally requires that for 3 years following the commencement of banking operations, the institution shall obtain approval from the appropriate FDIC Regional Director prior to any major deviation or material change to the business plan before consummation of the change. In
(2) Cross Support. If two or more insured depository institutions are at least 80-percent owned by the same investor(s), those investor(s) must pledge their stock in the commonly owned institutions to the FDIC against loss.
(3) Transactions with Affiliates. Insured depository institutions acquired by investors may not extend credit to investors, their investment funds, and any affiliates.
(4) Secrecy Law Jurisdictions. Investors using organizational structures domiciled in bank secrecy jurisdictions64 are not eligible to bid on insured depository institutions unless the investors are subsidiaries of companies subject to comprehensive consolidated
supervision as recognized by the FRB and they agree to certain additional requirements.
(5) Continuity of Ownership. Certain investors are prohibited from selling or transferring their securities for 3 years following the acquisition, absent prior FDIC approval.
(6) Prohibited Structures. Complex and functionally opaque ownership structures in which beneficial ownership cannot be ascertained, responsible decision-making parties are not clearly defined, and/or ownership and controls are separated are not appropriate for approval as bidders of insured depository institutions.
(7) Required Disclosure. Investors subject to the PCI SOP are expected to submit to the FDIC information about the investors and all entities in the ownership structure.
The FDIC reviews other applications submitted with the clearance-to-bid request for compliance with regulatory requirements, as described below.
Shelf Charters. For all shelf charters, the FDIC evaluates the deposit insurance application, using the following seven factors from Section 6 of the FDI Act:65
1. The financial history and condition of the proposed depository institution.
2. The adequacy of the proposed depository institution’s capital structure.
3. The proposed depository institution’s future earnings prospects.
4. The general character and fitness of the depository institution’s management.
5. The convenience and needs of the community to be served by the depository institution.
6. The risk presented by such depository institution to the DIF.
7. Whether the proposed institution’s corporate powers are consistent with the purposes of the FDI Act.
Inflatable Charters. For inflatable charters, the FDIC evaluates the change-in-control application using the following six factors from Section 7(j)(7) of the FDI Act:66
64 Bank secrecy is a legal principle under which banks are not allowed to provide to authorities personal and account information about their customers unless certain conditions apply. A bank secrecy jurisdiction is a locale that permits bank secrecy.
65 12 U.S.C. § 1816.
66 12 U.S.C. § 1817(j).
1. If the proposed acquisition of control would result in a monopoly.
2. If the effect of the proposed acquisition of control in any section of the country may be substantially to lessen competition or to tend to create a monopoly, or would in any other manner be in restraint of trade.
3. If the financial condition of the acquiring person is such that it might jeopardize the financial stability of the bank or prejudice the interests of the depositors of the bank.
4. If the competence, experience, or integrity of any acquiring person or of any of the proposed management indicates that it would not be in the interest of the depositors of the bank or in the interest of the public to permit such person to control the bank.
5. If any acquiring party neglects, fails, or refuses to furnish all the information required by the FDIC.
6. If the transaction would have an adverse effect on the DIF.
In the event of a merger, the FDIC evaluates the merger application using the following eight factors from Section 18(c) of the FDI Act:67
1. Whether the proposed merger would result in a monopoly.
2. Whether the effect of the proposed merger in any section of the country may be
substantially to lessen competition or to tend to create a monopoly, or would in any other manner be in restraint of trade.
3. The financial and managerial resources of the existing and proposed institutions.
4. The future prospects of the existing and proposed institutions.
5. The convenience and needs of the community to be served.
6. The effectiveness of any insured depository institution involved in the proposed merger in combating money laundering activities, including in overseas branches.
7. The risk presented to the stability of the United States banking or financial system.
8. For interstate mergers that do not involve one or more insured depository institutions in default or in danger of default, whether the resulting institution will control more than 10 percent of the total amount of deposits of insured depository institutions in the U.S.
For inflatable charters that require FDIC review of a change in business plan application, the FDIC evaluates the application using the same seven factors used to evaluate a deposit insurance application.